International trade in goods and services that use lots of data has the potential to boost economic growth across the world, but sharing data across borders is sensitive to laws, culture, geographic distance, digital connectivity and a range of institutional questions. Research on how these issues should be considered by policy-makers as they create trade-boosting policies is nascent, and here we relay notable literature and findings as we contribute to the international policy discussion.

The Web changed international trade

The Web was developed with much more than international trade in mind, but has a strong bias towards unencumbered economic exchange. When ODI co-founder Sir Tim Berners-Lee wrote his proposal for the Web, he rejected systems for organising the world’s electronic information in one, grand, compartmentalised way, and instead believed that some simple bits of technology – identifiers and hypertext – could link pages of information into a network that would leave internet users to innovate in ways that they wanted, while also being able to connect to others. It’s that thought that spread the internet around the world, invited unimagined innovation, and connected billions of people in ways that they weren’t before.

Data infrastructure as trade competitiveness

Our primer on data-enabled international trade looks at the cross-border data flows from the perspective of trade competitiveness: the ability of a country to create goods and services domestically with data, and sell them to foreign consumers. We suggest that the quality of national data infrastructure will affect how much countries will be able to compete in the industries of the future, such as artificial intelligence, and the extent to which they could collaborate with others around the world and sell services that often include sensitive data about users. This raises numerous policy questions about how to develop data infrastructure and the international means of exchange.

Analysing trade competitiveness means looking at many of the ‘behind the border’ conditions in a country, such as the degree of competition and availability of skills, but there are two questions for cross-border data exchange that involve looking to other countries: one, market access and the ease with which companies in one country can sell to consumers in another; two, factor conditions and the costs faced by domestic firms in getting access to the resources they need for production. The former is a classic question of trade agreements and tariffs, while the latter is particularly acute in data exchange questions because the nature of the Web means that flows of data – the resource that enables digital services – should face much less friction than the exchange of more traditional raw materials, like oil or timber. This leaves us with a broad research question that we are considering in our work: what makes it easier for firms to export data-enabled products from one country to another?

It’s all about the institutions

The simple answer to this is ‘trust and institutions.’ The economist, Douglass North, won the Nobel Prize for his work on explaining the importance of institutions – norms, rules, and public bodies – to economic development, and the extent to which they reduce transaction costs, allow more exchange, and widen the range of things that a society can produce. But that’s easier said than done in one country, let alone a group of them like those in the European Union, or between nations on different sides of the world. According to Apolitical, there is a lot of detail in how we might develop institutions to facilitate data-enabled trade, and thankfully there is some research – discussed below – on what affects international trade in digital services that we can use to think about the policy landscape for data questions.

Getting close, digitally

Research has revealed that some countries that are far away from each have a high degree of ‘virtual proximity’ – the number of bilateral links between web pages in one country and another – that helps them overcome geographic constraints, perhaps because they share similar tastes and language connections. The spread of the internet has increased trade, as has the domestic use of it in countries, with notable benefits for poor countries. But internet use in some countries actually seems to raise the amount of consumption from domestic providers – according to research for the European Commission – instead of that from foreign suppliers, although consumers also appear to search further afield for unusual items. This might be because local providers are better able to satisfy local tastes and internet use just raises demand and competition. This is supported by the findings of academics at the University of Toronto that music and games are much less likely to be consumed further away than websites for software and financial products.

The performance of countries in international services trade differs considerably. In countries such as France, Germany, Italy, Portugal, Spain and the UK, domestic providers of online digital services dominate, while the United States has been able to establish leading positions in more foreign markets than any other. That might be the result of domestic conditions in the US producing more competitive products or familiarity among foreign consumers of US products. But if we turn the question around and ask about the distance of foreign suppliers from US consumers, we see that even a small increase in physical distance from the US means that a foreign website for services that involves a financial transaction sees a 2.7% fall in its likelihood of being visited by an American consumer.

We are going to build on our report into the links between data infrastructure and trade competitiveness by developing a methodology for how countries can be assessed for the ability to create and export data intensive goods and services. And as we do this we’ll need to take into account all of the issues above, but it will be only one part of research and policy literature that needs to be written in the years to come.